One of the factors of the Brazilian economy to pay attention to is the basic interest rate, the Selic, fixed by the Central Bank. The current rate, at 2% per year, is the lowest ever recorded in our history and, although we want it to remain at that level, there are indications that this is not yet a point of arrival. The data from the Central Bank’s Focus survey and the future market interest curve, for example, show another trend.
The reasons for this market expectation are the complex external environment and the uncertainties regarding the direction of the country’s public accounts.
Monetary policy is guided by the control of inflation, it is the mandate by which the Central Bank is guided. Inflation in Brazil in the last 12 months is 2.44% and is considered low. The problem is that the market usually looks ahead to the risks when making its investment decisions – and in the last months of the pandemic, with the growth of the fiscal deficit and public debt, it started asking for more premium to buy government papers.
This type of demand ends up generating nervousness in the market, which impacts the long-term interest structure.
The interest rate reduction was the work of the Central Bank, which was able to accurately assess the needs of an economy that faced consecutive recessionary periods, this time caused by the pandemic.
Although this is an atypical moment, marked by fear, suffering and economic breakdown, we can see the positive effects that low interest rates can have on the economy, even if partially. Millions of entrepreneurs needed credit to maintain their business and benefited from it. The capital market, real estate credit and construction are examples of the positive impact on the generation of investments and jobs.
This period of basic interest of 2% per year creates in Brazilian society a feeling that we have a historic opportunity and challenge, which combine.
The opportunity is to achieve a situation of confidence that the Selic will be able to maintain itself as it is for a long period, giving the much-needed predictability for economic agents to carry out their investment projects.
It is essential to keep inflation within the target. There are occasional food pressures, but the most important thing will be when we overcome the recession caused by the covid-19. It would be advisable to reiterate discussions on ways to increase the productivity of the economy and accelerate structural reforms. This requires a very broad agenda, with sophisticated political negotiation, but it is worth the effort because it is absolutely necessary: only with new fundamentals that aim at the efficiency of the public machinery and the country’s tax structure will it be possible to grow again without inflationary pressure.
The challenge is austere fiscal management, as important as controlling inflation. Three legal provisions form the country’s fiscal anchor: the golden rule, the spending ceiling and the Fiscal Responsibility Law. Due to the expenses with emergency aid, fully justified, doubts arose about the continuation of fiscal discipline. It will be necessary to recover this perception of commitment.
Time is short, but it is important to signal that we continue on the path of this reform agenda.
Brazil has a long history of high inflation, high interest rates, lack of budgetary control and irresponsibility in the administration of spending, which has already charged society a high price in the form of low economic growth, unemployment, poor public services and social inequality. We now have a duty to leave these distortions in the past.
We all know how hard the road ahead will be to keep interest rates low. On this journey, nothing can replace the approval of reforms. After all, as the philosopher said, there are three things in life that never go back: the word spoken, the arrow struck and the missed opportunity.
* Luiz Carlos Trabuco Cappi is chairman of Bradesco’s board of directors. Writes every two weeks.